Nomura expects the European Central Bank to keep the deposit rate at 2.00% at the 30 April meeting. It also forecasts the rate will stay at 2.00% through Q4 2027.
Policy is expected to remain data-dependent after the Iran war shock. Key inputs include Brent crude oil prices, inflation expectations and wage dynamics.
The forecast assumes the Middle East conflict leads to an energy price shock with limited medium-term effect on the euro area economy. The ECB is expected to wait for evidence in incoming data rather than respond immediately.
Nomura sets a condition for rate rises linked to oil prices. If Brent stays above $95 per barrel by the ECB’s June meeting, it expects 25 basis point increases in June and again in September.
A rate rise would require signs of persistently higher inflation, as in 2022, or a rise in inflation expectations. June is seen as the earliest meeting when the ECB could raise rates in response to the Iran war.
We expect the European Central Bank to hold its deposit rate steady at 2.00% during its upcoming meeting on April 30th. The decision itself is widely anticipated, so we are focused on any change in tone regarding future policy. The central bank will likely want to wait and see how the recent shock from the Iran war affects the economy before acting.
The key risk for a more aggressive, or hawkish, policy shift is tied directly to energy prices. Brent crude has been volatile, recently trading around $98 per barrel after the latest geopolitical flare-up, which is above the critical $95 threshold. This is compounded by recent data showing Eurozone flash inflation for April ticked up to 2.8% and first-quarter negotiated wage growth remains firm at 4.5%.
For derivative traders, this creates an opportunity in the volatility market for interest rates. With the April meeting likely to be a non-event, options on June and September Euribor futures could be mispriced if they do not reflect the significant chance of a rate hike. We believe positioning for higher volatility is prudent as the market digests incoming energy and inflation data over the next month.
We are also looking at curve-steepening trades, where traders might position for short-term rates to rise faster than long-term ones. We remember the energy shock of 2022, and the Governing Council will be very sensitive to any signs that current inflation is becoming embedded in expectations. This historical precedent from the last major inflation wave suggests the ECB may act more decisively than the market currently expects if oil prices do not fall.
Ultimately, the price of oil will be the most important factor for the ECB’s decision in June. The spot price of Brent crude has effectively become the primary signal for near-term monetary policy. Therefore, any positions in interest rate derivatives should be managed alongside a close watch on energy markets.
